Show notes
Peter Tchir, Academy Securities Head of Macro Strategy, points to potential issues in the global supply chain amid ongoing geopolitical conflicts. Libby Cantrill, PIMCO Managing Director of Public Policy, says the margin of error for House Republicans to avoid a government shutdown has narrowed. Dan Ives, Wedbush Sr. Equity Research Analyst, predicts that Apple could look to buy ESPN. Alexander Goldfarb, Piper Sandler Senior Research Analyst, says the commercial real estate market is in the midst of a rare phenomenon.Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance Full Transcript: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. Our guest of the Morning to synthesize all this with our question. Peter Cheers joins us. Now ahead of macro strategy at Academy Securities, you look for price up, yield down. What will that do to the equity market. I think for now it's going to be good. I think we see four thirty on tens before before we see four to seventy five. I think the pain trade is actually to lower yields. A lot of people who are bullished at five kind of got short again. I think that works until we get down about four thirty five. Equities rally on the back of that. Then we realize we're getting here because things like oil copper receding because the economy is actually slowing fast so I think at that point that's when the recession fear start getting priced back into stock. Taking Academy Securities three year view, you've got that slowing global demand. Nick bennenbrook On from Wells Fargo stunning with a two point four percent global GDP call. Can you own equities out with a three year vision? I think you could if you had a three year vision. I think right now it's more like a two to three week vision. Everything's so volatile. We don't know where this economy is turning. We don't know what's going on there. And one thing that's starting to scare me is we're having a lot of discussions about the Middle East. We're starting to hear a little bit more concerns about supply chains. I don't think it's an issue today, but if as this drags on, if there's any degree of escalation, supply chains become an issue again. So I think that will be a big drag on the economy. The Middle East crude last month is just unreal. To see a move of almost eleven percent lower on WTI, even with the heightened tension in the Middle least, A lot of people appointing to maybe demand starting to crack in a certain places around the world, Europe one, maybe even the United States gone into next year. What's your view on that. Yeah, I think the last time I was here, I said buying oil was not going to be a good hedge for escalation there because oil had been under so much pressure before, and I think that's what we're seeing again. There's just that lack of demand and the Saudis definitely have the ability to turn on the tap if they want. We're clearly trying to figure out how to work with Venezuela, and so far it looks like Aram's going to continue to pump oil despite the sanctions, despite the height intensions there. So there's not much in favor of oil right now, and I think that's a very crowded long position, so I could see that breaking lower coming into next year. You mentioned a two to three week view. I'm with you. You You know what's about to happen. Then in the next two to three weeks, we're going to get a load of people publishing their outlooks for twenty twenty four. Can you help us understand how you get any visibility whatsoever into next year? What's the strategic view going into you know, I think there's still some big themes. I think AI, how people are using AI, the efficiency that that could cause for companies. I think that's going to be a big theme still. So you can look over that. Where are we going to be on the defense spending? Where are we going to be in terms of geopolitical spending. I think the reshoring is still real. I think a reasonably healthy economy with their decent jobs is still the overriding thing. So I think markets are a little bit more volatile, volatile right now than the underlying economy is. So if you put this together to what you said earlier, that you see benchmark ten year yields getting down to four point three five percent before going back up to four point seventy five percent, or just basically they're heading lower. Does that mean that we're going to have slower growth but still the soft landing and that it basically people are going to get a little concerned about stocks, but that it sets up a rally. And I'm just trying to understand. No, I think a very convoluted range of thoughts. So I think as we move towards four thirty five, you get this, Oh, this is all good for stocks, and then as you start moving below four forty, I think people realize, oh man, we're getting there. Because things are not in the economy. The job market has changed, you know, white collar workers aren't doing as well as they were. You're seeing, i think, some potential for spending. You're seeing little cracks in the housing prices. So I think, all of a sudden, by year end, we're going to be back on a hard landing discussion and it'll be the boy who Cried Wolf, but we'll all be back talking about no more soft landing. We've overdone it. So you think that at that point, treasures will continue to be Haven's once again, even though arguably one of the biggest drivers of the yield move has been Washington, d C. And it doesn't look like that's changing. That's not changing. But again that's a three five ten year sort of pain. It's you know, we get ahead of ourselves. And I do think the one problem we all have is the bond market's so big. You talk about these numbers, two hundred and fifty billion, and it's huge, but it's you know, a fraction of twenty five trillions. So I think the ability to digest this you see corporate bonds come out twenty two billion yesterday, I believe it was you know, there's no problem digesting this, so I think the market's pretty healthy. I think people see yields as attractive. You're going to see people continue to add to that, so I think that's fine. It's going to be the risk side of things that gets people a little bit more spooked. Tell me about the November real yield shift we've seen. We've seen the ten year real yield migrate two point five zero percent to two point one nine percent. That makes things easier for everybody, right, it does. But I think the nominal yields still play a big role. They're still relatively high, and we had that move from you know, three seventy five to five, so we haven't clawed a lot of that back. I think there's this long you know, invariable lag time is really long. This time people did such a good job locking in yields. It's only now that you're hearing more and more people have to roll over their debt. Right if you issue to your debt back in the hey day, Now it's rolling over. Three year debt's not quite rolling over. So I think we're just starting to see that slow down impact. And I think one point John brings up, we've got what we've been calling this faux liquidity, this fake liquidity. It feels like the markets are super liquid at any given price point, but the ability to gap high or low is there. So I think we got pushed to five percent by people getting stopped out, pushing on yields. We're now got back to four fifty in a heartbeat because people are getting stopped out. So that's what we're trying to I think manage is like, what's the real noise versus the signal? You mentioned the Great Financinc. The Great Financinc. Of the pandemic, the huge wealth transfer we had from Treasury to the consumer. Consumer balance sheets were stronger. Everyone under the Sunny wonder House remortgage termed out that debt low rates. Corporate America did the same thing. One place didn't Treasury standrug Amit has been very critical of leadership a Treasury over the last i don't know, five years through that low interest rate period not termin out the debt. What are your thoughts on that? What do you think about that conversation? Yeah, I think they should have done what corporations did. I'm always a big believer, right, you know, borrolong it blocks in, you reduce volatility. And we're having a lot of conversation with clients. Probably a little bit hypothetical at this point, but maybe people are supposed to be under weight treasuries and T bills and way overweight whether it's commercial paper or corporations. That right, if you take a step back and talk about this as being governance, right, the US governance is offer right now in terms of our spending, in terms of we talk about not paying our bills. Right, you look at the large corporation's world. They have good corporate governance, they have global plans. They never once would ever even think about saying, oh, we're not going to pay our debt on time because we don't feel like it. So I think you're supposed to be starting to push really heavily to overweight high quality corporates, maybe in commercial paper, maybe some abs, and move really underweight T bills. So do you foresee a time when Apple can borrow at a lower rate than the US government? You know that ability to break the sovereign ceiling rarely happens, even in emerging markets. I don't think it happens here, but I do think you can see really tight spread compression, especially at the front end of the corporate bond curve. So I like that as a trade. Do you think we get convergence spread compression on governance issues alone? I think that will play a part of it. Yeah. I think the top quality companies have a ton of cash. The liquidity in the bond markets not what it once was, So whatever you have to pay up their own tea bills, maybe you don't. And I think this government issue is going to become a real thought again. If you think about it, why would you lend to someone who talks about not paying your debt because for a long time they've had the privilege of acting recklessly correct talked about this so many times there's been no consequence for it. Why is this time different. I think something we talked about before snapped in the market, and all of a sudden people are really questioning this whole you know, correlation or coalescence of events that have been on the back of everyone's mind. I don't think it cracks this time, certainly, but I think it starts setting us in stage again. I always go back to the Great Financial Crisis. It started breaking in two thousand and six, got fixed, broken in in two thousand and seven, got fixed, broken in in two thousand and seven, got fixed. So I feel now we've started this unwined and unless DC gets its act together, this is going to be Every time it rears its head, it'll get uglier. But it's not this year's story anymore. Pet love it always thoughtful Pitcher. There of academic securities. Lebby Cantrell joints Now managing director had a public policy a pinkel. You're the only one I can do this with. Can you take the election results and you can fold them into a government shutdown which happens in about three cups of coffee? Can you make that exercise happen? Yeah? Well, good morning, and thank you for not asking me a question about orgo. I did I take organic chemistry at school, so thanks thanks for testing me on that. Yeah, so I do think that the read through actually from last night, Tom So thanks thanks for a layup. Here is actually Democrats won a special election in Rhode Island. This was a is a blue race, a blue seat, this is a house seat. That means that they have two hundred and thirteen seats in the House. Republicans, however, only have two hundred and twenty one. They have a special election in Utah in a few weeks. The reason why this actually means this is important from a government shutdown perspective is that means practically that Republicans now can only lose three seats excuse me, three votes in order to pass a funding bill that they need a pass to avoid a shutdown by next Friday. So it just means that the margin of error is much more narrow for Republicans. Speaker Johnson was already needing to thread a needle, if you will, and that a needle point has just gotten even more narrow from the result from last night and threading the needle. What will moderate Republicans do? I don't have it in front of me, but I'm going to suggest on Long Island east of New York City, the Republicans had a good night. What are the moderate I guess the former president would say, Republicans in name only. How do they adapt an adjust off the selection? Yeah, I think that what we learned last night is that the abortion rights still very much resonate. That was obviously a takeaway from the twenty two, twenty twenty two midterms, where abortion really emboldened turnout. It shows last night that this really is very much an issue, especially when it is on the ballot. Now, I think for twenty twenty four, many of these folks, particularly in those districts Tom that you mentioned, where there are you know, Republicans who are defending Biden districts. The Democrats will make this an issue. You're going to hear a lot about abortion rights over the next year because of the results of last night, just sort of underscoring that this clearly is a resident voting issue for voters. So in terms of the government shutdown, what does that make those moderate Republicans do They are voting in lockstep here. They really are trying to give Speaker Johnson, you know, the benefit of the doubt. I think that will continue. I think the big question for markets is, though, is that enough can they actually avoid a shutdown If they pass a partisan bill, Tom, we will see a shutdown next Friday. So again kind of an open question of how this all resolves. But as of now, it looks like they are voting in a partisan way, which means that shutdown risk is you know, I think is increased over the last week or so. Do markets care though, I mean, as a shutdown basically, okay, they're going to do it for twenty four hours for effect and then we'll move on. Yeah, least, I think that's that's that's that's the real the real issue. If it is a temporary shutdown, no, this will just be more DC noise. If it's a longer, more prolonged shutdown, it does become I mean, the economic impacts of you know, lots of federal workers being furloughed not actually collecting a paycheck could matter. And also, you know, the data matters, right. If we don't get data from the Department of Labor, for instance, that makes the Fed's job, you know, a little bit a little bit harder. And we can also see, you know that this term premium that you all been talking about, we could see you know, some of the yields back up again as well on account of this. So I think you're right. If it's a short term shutdown, no, the markets probably don't care. If it's longer term, however, you know, it may it may weigh on you know. Again, I just sort of the confidence around sort of the political apparatus in Washington, d C. Just shifting from last night's elections to what we're expecting next year, a presidential election. How much of a certainty do you think that it is that we're going to President Biden versus former President Trump. How much will tonight's debate really color that discussion about potential other running candidates for the Republican Party in particular. Yeah, so, I think what we've been messaging to client Lisa is with high conviction President Biden will be the nominee for the Democratic Party. This idea that he is going to drop out, that Governor Newsom, for instance, may jump into the race, it just is not It's just not realistic at this point. Nor is there any indication from the Biden camp that he has any interest in dropping out or any intention of dropping out. So he will be the Democratic nominee again, you know, excluding or assuming there's no sort of exident health issue or what have you. On the Republican side, I President Trump obviously has an incredibly formidable lead in the polls, but this is actually a really important point. He his campaign is much more organized, i think by his own emission, than it was in twenty sixteen, and they have been systematic changing the delegate rules in the states in terms of how the state primaries allocate delegates to his benefit. So not only does he have this formidable lead in the polls, but he's also sort of changed the kind of the machinations behind the scenes in terms of how these delegates are allocated, and of course getting the nominations just a delegate game, So the fact that he's been changing these rules is to his benefit as well. So, I mean a lot would have to happen, I think tonight and over the next two months. Now. I think what we can show from even last night that voting behavior is the most important thing to look at and polls are not always right, and so particularly in Iowa and New Hampshire, Nevada, and South Carolina. Those are the four the first contests, Lisa, and how we're guiding our clients is if Trump wins all of those, then he very likely is going to be the nominee. However, if there's somebody can test one of those that it could be easily become a two person race. But again sort of remains to be seen. In terms of tonight, it's really a race for number two DeSantis between and Haley. Yeah, I think we will see it be pretty pretty nasty and pretty ugly tonight. I'm looking forward to that debt a little bit. Nice Levie, thank you going to catch out you're one of the best. You're going to catch with a pimcot the vix at fourteen point eighty four. That is a Dana Ives market you, Senior Equity Research Channal web Bush. You refuses to talk to us when Apple learnings come out. We only get them to pick up the debris and we can tell for those of you on radio, you can understand these long Lily Pulitzer as well. This morning. Great, Look, Dan, I want to talk about your two forty call on Apple. You're not lonely. There's a few other people out there with dana Ives optimism on Apple. When I saw those margins and a company managing for profit not revenue growth, can you raise your two forty estimate? Yeah? Look, I think this is just the beginning of the next fees of the Apple store. You look at margins that are historical. You look what's happening on services now mid teen growth, and I despite the haters continuing to hate, is growing even when you take out currency and you it's even growing more asps the China iPhone demise story is a fictional Netflix story, and in my opinion, this is just the start of what I ultimately view is at three and a half to four trillion dollar market. So slow day, we got to make some news here. Can you pop from two forty up to two fifty this morning for us? Look, I believe that I believe are the best case or the bowld case is probably closer to to seventy five as this all plays out, because also now you don't have AI in those numbers. This is just the get out the popcorn moment for when Apple ultimately I believe, over the next year, introduces the AI app Store, and that's just going to be you know, ultimately from a services perspective, that could be an incremental five to ten fifteen millions. You made a couple of statements, so let's stroke down on them. We can do that. Your friends, you talked about growth at the iPhone. What growth are you talking about? So if you unit growth, units are growing into the December quarter, you also if you take out currency, which is a headwind, you have basically mid single digit growth. You've been talking about a massive boom of people upgrading. I guess my questions you dan to be polite about it. Have you been right for the wrong reasons on the stock to acknowledge that? I would say that ultimately, if you look at this, what I've used a mini supercycle that's playing out. The ASP stories played out, and I think our biggest call has been China. Despite many yelling fire in a crowd theater, the China growth is actually increasing, not decreasing. But they had a down quarter right in China. Well, if you look at China, Meanli in China was actually a record for the September quarter. When you look at the overall, you know, as Keen talks about the initial reaction after sure iPads, max that and three dollars get your cup of coffee, I'm focused on iPhones where units were up in China. Well, I'm struggling with that. And you'll appreciate this. If you came on today and say margins it better they are. I'm with you, Okay, Margins are great service revenues where the growth is that deserves a high multiple. I understand that maybe you can make the case for why the stock is high this year based on those things. When you say things like iPhone supercycles, when we've had no growth for four quarters in the company, that's where I struggle. Can you have the understanding this? So it's dissect that first. When you're thinking about the card five six hundred BIPs f X headwinds, that is actually underlying growth that you're seeing an iPhone units. Just to steady state it. I also believe our whole view of the iPhone cycle is really going to be over the next three, four or five quarters. That's where you're going to have these upgrades that actually come through. I'm not saying that you don't have some maybe share minor share of Watses on the sort of mid tier, but in terms of high end as a utility, this essentially is going to be a mid to high single digit growth on iPhone, and when you start to run that through, that could be an incremental one two three dollars earnings As you look out next two three years. There's a lot of growth already baked into valuation, and a big piece of valuation is where the buyers are going to come from. And you've been traveling around the world trying to hold everyone's hand and convince them that there is still value in big tech. How much do the losses of other areas of the tech like sphere and I'm thinking of Masioshi's Sun and the more than eleven billion dollars loss on we work. How much does that play into a little ambivalence about buying the story right now. Look, I think you're definitely having winners and losers in terms of this just broader economy, and I think in terms of the Magnificent seven. In terms of big tech, I think the strong gets stronger. But he said, to my point, you know, being an easier for a few weeks, and in Europe, you know, it's very easy to sit there here in New York on your tenth floor spreadsheet being negative on Apple. What I see out in the world is a much different environment in terms of the growth that happening. And I believe tech to your point, you're going to see the strong continuing to dominate. And I think in terms of AI, we are just in the early stages of monetization. I think that's a big thing in this tech ball market. Microsoft saw it in terms of AI, you're starting now see monization data dog that's a Hall of Fame quarter in terms of what we saw there, pallenteer the messy of AI, and I believe ultimately right now the AI gold rush is actually starting. That sounds lovely on that side. On the side of how much we're paying for price monetization and monetization of AI, am looking at Apple plus in sort of the amount that though that's increased, are we going to be paying six hundred dollars a month to Apple for all of our various services? Look, I think over in there, But to your point, I think over the next year or two, I think the average Apple user is going to start to definitely increase what they're paying Apple on the services because ultimately, as it goes out, the A I technology that's gonna be in fitness health in the app store, that's just going to give them just another added growth to the monization of Coupertino. And I think part of why the stocks reacted, you know, despite you know many I think being very negative initially, as it's come through, you know, to Pharaoh's point, iPhone, you're now starting to see grow services mid teen growth margins. This is just another you know, flex and muscles moment. And I think that's on a sum of the parts, how this is a stock that Ultimate is gonna be a four trillion dollar markup by twenty twenty five. Just picking up on penalty the messy of Ai. Why why are they the messy of Ais? Because I believe they are the pures play AI name in the market period. And and look, Palenteer is one where you know, many have been negative on that story for a number of different reasons. But I think what you're seeing now happen is that they've actually parlayd enterprise success and you're seeing the use cases explode. I believe Palteerman twenty five is are a base case, but that is the golden child of AIS. I'm gonna make some news any day now. Do I see another massive, mega billion dollar Apple debt offering. Look, I think that's something that you know clearly, you know could be on the table. I think the bigger thing for Apple is I think they're finally going to look at M and A, and we've talked about I think we got to extend the in They're gonna buy Disney by by the week. I believe ESPN is the asset that Ultimate by Okay, you but for that, I think thirty five to forty billion in terms of what bates transaction, but it could not beats three and a half billion. But also it goes back to the MLS deal that was I think where the light bulb went off in terms of live streaming sports. I think ESPN is a unique ass And look right now, you look at the top of this mound, it's Nodella, it's cook, you know, it's You're really starting to see ultimately more of an opportunity where they could go on the offensive ratherland defense. Okay, it's good to see you. Thank you, buddy Dennice of web Bush. It's joining us to talk about just how bad of a time this is for this to hit. Alexander Goldfarb, Senior Research and Analystic Piper Sandler. I want to start there, Alexander. There've been talks discussions around the number of leases that we work is going to abandon. Is the pressure on commercial real estate office space in particular in New York is it overstated right now or understated? Well, good morning Lisa and Tom, and thank you for having me on you know here at Piper Sandler. When we look at what is going on in office, it's it's eerily similar to what happened with malls. You know, over the past decade. If you recall, everyone pre pandemic thought every single mall going to close because everyone was going to shop online, and in fact what happened is the dominant malls like the Roosevelt Fields or Houston Gallerias continue to excel and lesser malls fall away. The same thing is with office. So if you look at we Work, which we don't cover we Work, but if you look at some of the fallout out in San Francisco, they rejected a bunch of leases. They did not reject one lease from Boston properties. When you look in San Francisco, when you look in New York, you know, companies like s Green Bornado have zero exposure now to WE Work because they exited those we Work leases over the past number of years, and even Boston properties only as one percent. So when you look at the fallout that's going to happen, and you look at the major reats and especially the ones that we cover here at Piper Sandler, the impact is negligible. And what's really interesting is when you look at office, especially here in New York, it's gravitating around Grand Central, and actually you're seeing rents increase on Park Avenue. So just like MAUL, the dominant office will survive the lesser the generic office. That's where the trouble is. So are you saying right now that the prices have baked in a lot of that trouble or that people just haven't been discerning enough to understand the winners versus the losers. Absolutely. If you speak to the brokerage community like Newmark, they are starting, They and Cushman and the other brokerage companies are starting to discern the difference between top tier versus generic, Class A, class B, etc. So when you look at what tenants want today, tenants want, you know, great space with a lot of amenities, convenient, convenient for commuters, and they want a landlord who has the capital wherewithal to invest in the properties. And let's face it, the brokers want to get paid a commission and you're seeing that fallout. It's no different than we've seen in retail. So again I use the mall example, Simon Property Group, you know with their billion dollars a year from task, so tenants know that they can be there the same as happening in reats with companies like sl Green. That's right where I wanted to go, Alexander, you are reading my mind. What is David Simon going to do with this folks? Simon Property Group Indianapolis three thousand employees. What is the guy from Indiana University can do? He's seen this before we come down. But my history is fresh money always comes in. When does the fresh money click in? If transaction to transaction, I'm down forty percent. Well, you are speaking David's mind. He loves cash flow. So since IPO, the company's paid out thirty nine billion in dividends, and the reason they've done that is by investing shrewdly. So when you look right now, he's very focused on investing in his malls. So apart from the Tallman acquisition, which was structured before the pandemic, he hasn't bought anything on the outside. His focus has been investing in the malls like out in Northgate and Sea out Of where they're converting it into a hockey arena, or Houston Gallera where they're adding office and apartments, etc. So that's where he's focused. But let's face it, given the challenges away from Simon. He can pick and choose. But if you look, he's making a ton of money out of his portfolio, which people forget is actually small. It's only one hundred and twenty malls and only two hundred or so domestic properties in total. So he's a large company but with a small powerhouse portfolio, right, Ben Alison, I got to make some headlines here. We're in the business and news, Alexander. There's blood on the streets. We see it in New York, and I get it. New York's its own little weird place, but there's all across the nation real estate blood on the streets. Are you saying your world of reats back to when you were at Lehman, your world of reads? Is it now a screaming by because of all the agony Lisa was just framing, So it's not a screaming buy in the sense that interest rates are high. Right, we have a tenure that was approaching five percent and it's now backed off a little. But certainly the financing market, which as you guys have reported, is basically shut down, right, CNBS market is tough. You walk into a bank and try to get a construction loan, they'll call the cops on you. They're like, we don't do that right now. Right, So lending is very tough. The transaction market is almost on ice because of the widespread what's interesting people missing? Tom, You're like my first boss at Liam and David Shulman. You've been around a number of decades. Real estate right now is benefiting from a phenomena that it has not had in a long long time, which is low supply because nothing new is getting built, and low vacancy. That combination is really powerful. And you started the show by saying, how is the credit going to get worked out? Again? As you as we've spoken before, back in the GFC, everyone was panicked about the CNBS. No one can tell you where the benchmark GG ten? What happened to that famous twenty two thousand and seven feel right, stuff gets worked out, Obviously there will be pain, there will be blood, for sure. But if you look at real estate's biggest benefit right now, it's that lack of supply and low vocacy. That's a huge positive that is underappreciated by the market. Just about thirty seconds. What happens if there's for selling, akin to re work, so we work is a tenant, so you don't really have force selling from that. But to be clear, banks where everyone's focused on, they're not in the business a running real estate, right. So as long as it's a good asset with a good sponsor, they're going to work out some deal. Because, as the old adage goes, a rolling loan collects no loss. That said, there's clearly going to be assets that will go back to the lenders. And those are the assets where the economics don't exist. That's the stuff to worry about. But the big properties like the three ninety nine Parks, the one Vanderbilts, those big centers or are going to be fine. And again, when you look at where the value in real estate is, it's a crewing at the top. But you're right there will be blood, and the blood it's going to be generic assets. Alexander Brilliant, Alexander Goldfire years of work at Piper Sandler now on real estate investment trust. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot com, the iHeartRadio app. Tune in and the Bloomberg Business App. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. 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